Transportation Network Services: Uber vs. Lyft vs. Taxis

Local transportation options have expanded recently due to the launch of Uber and Lyft; these services seek to address some of the problems with taxi services. This activity is important because services represent a large portion of our economy, and effective management and marketing of services is crucial to the success of many businesses.

The goal of this exercise is to recognize that service, though intangible, is as much a product as any other that can be physically possessed. Ensuring that these services are effectively managed and marketed is integral to the survival of the businesses that offer them.

Read the case below and then answer the questions that follow.

America might be a car culture, but there are plenty of times that people simply don't want to drive themselves. Whether they live in an urban environment that makes driving and parking difficult, want to avoid the costs of insurance and maintenance associated with owning a car, or just need rides in particular situations like after a night out on the town, people have long required the services of drivers. But whereas in the past their options were largely limited to taxi services, today the transportation industry is in the midst of a radical transformation, due largely to the impacts of Uber and Lyft.

The idea for Uber began with the frustration of a couple of tech-industry friends who could not get a cab on a snowy night in Paris. They developed an app for a car-sharing service and began introducing the option in major cities around the world. Within a year of establishing its New York City operations with three cars, Uber had raised tens of millions of dollars in financing, and it was rapidly expanding into many cities.1

With a presence in approximately 400 cities worldwide, Uber touts its benefits for riders, drivers, and communities. In particular, it highlights its ability to offer affordable, flexible rides to people at exactly the moment and place they need them. For drivers, Uber is an employment alternative that enables them to work exactly when and as much as they want, for a reasonable compensation. In addition, Uber asserts that its services make cities safer and expand transportation options.2

Lyft followed Uber into the market, but its expansion is not quite as extensive. Available in approximately 200 cities, Lyft seeks to differentiate itself from its bigger rival mainly in the friendly image it evokes.3 Drivers adorn their cars with fuzzy pink moustaches, and riders are encouraged to sit up front and chat during the trip.4

In general, though, the services are remarkably similar. Both transportation network companies (the formal name established for these services by the state of California, which was the first to start regulating the offerings) rely on app-based demand channels to link riders with drivers. Both of them allow drivers to work as much or as little as they want. In addition, both companies currently rely on surge pricing to balance out their supply and demand, although Uber has plans to phase out this practice because consumers dislike it so much.5 With surge pricing, the companies charge higher rates during busy periods. Doing so can discourage some riders, who might be willing to wait a little while to get a lower rate. It also encourages more drivers to provide additional supply, because they can earn what is in essence time and a half for driving during rush hour or on Saturday nights.

In their efforts to gain share in each market in which they compete head to head, Uber and Lyft rely on various marketing tactics. They have cut prices in highly competitive markets, and they continue to work to recruit new drivers to reduce riders' wait times.6

Despite some attempts to regulate these services, the rules and norms remain somewhat uncertain. To address the concerns that such lack of regulation might induce, Uber offers a unique rating system, in which drivers have a means to rate riders, just as riders can rate drivers. When a driver's rating falls below a certain level, Uber contacts that driver to help ensure a satisfactory level of service. But when a rider earns a low rating, he or she may just find that no drivers respond to requests for a pick up, leaving the passenger stranded.

However, the rating system also might have some unintended consequences.7 First, because there are few rules for how to establish review of customers, drivers and renters can issue negative reviews for virtually any reason. One Uber driver noted that he gave bad reviews to riders who entered the vehicle with “negative energy,” for example. Nor are there any protections in place to avoid negative reviews based on race, gender, or physical disability. Thus consumers might be unfairly discriminated against in the reviews, creating a powerful ethical and legal concern. Second, the two-sided review system might lead to rating inflation. That is, riders want to earn positive reviews from the providers so that they can continue using the service in the future. To encourage such positive reviews, they might provide positive ratings of the providers, to avoid any negative retaliation, or feel compelled to leave larger tips. Third, customers do not have any control over, or in some cases knowledge of, how their reviews get used.

Across the board though, transportation network services continue to expand and grow in terms of both their reach in existing locales and their expansion into new markets. The need to grow has led to poaching efforts, such that Uber sends out “ambassadors” to try to lure Lyft drivers away to work for Uber. In addition, both companies try to empower drivers by granting them access to updated technology for their phones, to ensure they can find their riders. They also have started some collaborations with car dealers, to give their drivers good deals on new car purchases.